Japanese Shares Lead Asian Markets Higher in First Quarter

By

Daniel Inman

Updated March 28, 2013 6:01 a.m. ET

Japanese stocks surged in the first quarter to become the world's second-best performer after Venezuela and leading Asia higher, while investors soured on China as confidence ebbed over its economic recovery.

"You've had Japan at the one end, shooting out the lights, but the parts of Asia exposed to China have had a bit of a messy ride," said Shane Oliver, head of investment strategy and chief economist at AMP Capital in Sydney, which managed assets worth $128 billion as of December 2012.

The broad MSCI All Countries Asia Index was up 9.3% quarter-to-date as of Wednesday, its third consecutive quarterly rise. Global fund managers have continued to invest in riskier assets, especially the Philippines, Indonesia and Thailand, buoyed by an improved outlook for the U.S. economy and subdued concern over Europe's debt troubles for much of the period.

Japan has been the clear standout, climbing 18.7% quarter-to-date, while the yen has fallen 9% against the U.S. dollar since the beginning of the year, releasing some of the pressure on Japan's struggling export sector, and paving the way for the Nikkei's rally. Only stocks in Caracas have surged more, according to 72 global indexes tracked by data provider FactSet.

There are also high expectations for Japan's new government which has promised to turn around the country's persistent problem of deflation and anemic growth. A new governor has been installed at the Bank of Japan, and there are hopes it will introduce aggressive monetary easing at its next policy meeting in April.

The other winner in the region was Southeast Asia, where continued inflows into the region's fast-growing economies led to several of the relatively small markets bringing in healthy returns over the quarter—the Philippines PSE Composite added 17.8% this quarter and the Indonesia JSX has pushed 14.5% higher so far this year.

The latest sign of health in Southeast Asia was in the Philippines, where the country finally received an investment-grade rating from Fitch Rating, a move that could spur more investment in the country.

In other large Asian markets, it was the opposite, as economic confidence was lacking. Chinese stocks, which had a good start to the year, failed to live up to expectations as investors lost faith in the country's economic recovery. In addition, there were concerns about how Beijing will try to slow down the resurgent property market.

As a result, Chinese markets pushed into negative territory for 2013. This is particularly disappointing for stocks listed in the mainland, where Shanghai's 14.6% rally in December raised hopes that the market was coming back to life after several years of poor performance. The Shanghai Composite's gains ran out of steam after the Chinese New Year holiday in February, and now the market is down 1.5% for the quarter.

"It highlights that China is entirely its own show," said James White, senior analyst at First State Investments in Sydney. "I think that the China data is going to be stronger over the next couple of months, and the question is going to be inflation."

On Thursday, the final trading day of the quarter for a number of markets across Asia, stocks slipped lower. Japan and China though will still be open on Friday.

The largest move on Thursday was in mainland China, where the Shanghai Composite fell 2.8% to 2236.30 after the banking regulator announced a series of controls on wealth management products—a move to increase the level of transparency in this popular part of the shadow-banking system.

More broadly, regional markets recorded losses as problems in Europe remained in the spotlight—with concerns over political uncertainty in Italy and the Cyprus bank bailout.

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